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Following is the speech by the Financial Secretary, Mr John C Tsang, at a HSBC luncheon in Mumbai, India today (December 12):
Distinguished Guests, Ladies and Gentlemen,
Good afternoon.
It is my great pleasure to be here in Mumbai and to meet so many esteemed figures from the Indian financial sector. Like Mumbai, Hong Kong is the financial powerhouse of our nation. Our two cities already enjoy close ties, but I'd like them to be even closer. And that's why I'm in India, and that's why I'm so glad that I have an opportunity to speak with you today.
Since we are in India at the end of the Test series against Pakistan, allow me to draw a sporting analogy. In a global cricket team, Hong Kong would be an all-rounder. A team player, strong in all disciplines, always in the thick of the action, quick-thinking, versatile and able to adapt swiftly to any opportunities that come our way. Not the fastest bowler, or the most stylish batsman, but one of the most productive and reliable team members you could hope for. Of course, we also subscribe to the fine cricketing tradition of fair play.
Today, I'd like to talk about some of Hong Kong's strengths as an international banking centre, how we have been able to adapt to changes in our neck of the woods, and what this could also mean for the Indian banking community.
First, let me take you back a decade to 1997. This was not only the year that the Hong Kong Special Administrative Region was 'born', it was also the start of the Asian financial crisis. Reunification with the Mainland posed the biggest political, legal and social challenge our city has ever faced. The last thing we needed on top of that was a financial crisis that plunged the region into recession. Add the SARS epidemic, not one but two outbreaks of avian flu, the fallout from the 9-11 attacks in the US, and the bursting of the dot.com bubble, and you have a much fuller picture of the challenges we have faced, and overcome, during this period.
Thankfully, our economy has fully recovered. We recently registered our 16th quarter of above trend GDP growth; and we are on target to hit our full year forecast of 6% GDP growth for this year. The feel-good factor is back in Hong Kong.
I firmly believe that an unswerving commitment to our long-established, fundamental values was central to our ability to weather the financial crisis back in the late 1990s - and also the many other challenges that we faced subsequently. We had faith - and, indeed, have faith - in the future because we protect and cherish the values on which our success is built. These include the rule of law upheld by an independent judiciary; a clean, efficient government and zero tolerance of corruption; a level playing field for business; and, the free and unfettered flow of information.
Our other big advantage, of course, is China. As a British colony, Hong Kong was perched on the doorstep of the world's fastest-growing large economy. After Reunification, the door is wide open - we have crossed that threshold and are once again an integral part of our nation.
The unique "One Country, Two Systems" formula for our Reunification has ensured that our way of life, including our capitalist system, common law legal system and a wide range of freedoms, are protected by law and will remain intact for at least 50 years after 1997. So, "One Country, Two Systems" also helps Hong Kong deal confidently with the various challenges that come our way because it provides us with the institutional stability needed in such testing times.
Stability, however, does not mean that our market is not dynamic or promising. Far from it. With China's continued opening up and reform, and with our excellent foundations as an international financial centre, there are plenty of opportunities for growth and profit in Hong Kong's financial sector. Let me mention a few.
First, I want to touch on a new business venture for our market, and that is Islamic finance. Like Mumbai, Hong Kong is developing Islamic retail funds to attract Muslim investment. A high concentration of international banks, excellent regulatory environment, and a transparent legal system make Hong Kong a good location for such funds. Offering Islamic financial instruments will help to diversify our money markets and enhance our status as an international financial centre.
The first such fund was approved recently. Since then a number of institutions have shown interest in introducing Islamic bonds and other financial services targeted at this sector. Here, I would like to encourage India's large number of Sharia-compliant companies to consider investing in Hong Kong as we continue to develop these tailored investment products.
Something else we are keen to see is more overseas companies listing on our stock market. In terms of market capitalisation, Hong Kong's exchange is the world's seventh largest, and the third largest in Asia after Tokyo and Shanghai. According to the World Federation of Exchanges, Hong Kong's market cap at end-October was around US$3 trillion.
For Hong Kong, with a population of seven million and a land area of 1,100 square kilometres, that's not too bad an effort. But, for us it's not good enough. We want to build on this solid footing to develop Hong Kong as a truly global financial centre on par with London and New York.
Nearly all of our listings are Mainland and Hong Kong companies. While that has brought us to where we are today, we need to expand our appeal and capital pool if we are to meet our global ambitions. So, consider this an invitation - we would like to see Indian companies listing in Hong Kong. And not just that, we would also like to see you do business in Hong Kong, and to explore opportunities in China and the rest of Asia with us.
Now, this is where some of Hong Kong's "all-rounder" skills come in.
As well as opening up our stock market to more overseas companies, Hong Kong is also playing a role within our country to foster the smooth and orderly outflow of capital from the Mainland of China. The challenge here is to dovetail the financial infrastructure of our two jurisdictions because Hong Kong has a completely open capital account and a freely convertible currency, while our sovereign does not.
We are working on it. Hong Kong is now the only testing ground for the internationalisation of the Mainland currency, the Renminbi. This business is an exciting and evolving opportunity for our financial services sector - especially when you consider that the Mainland's total domestic savings are estimated to be worth about US$2 trillion.
Our financial institutions are already well versed in Renminbi transactions, which were introduced in Hong Kong in 2004. Since then, some 40 banks have started to offer Renminbi services. And, at end-September this year, Renminbi deposits amounted to some 28 billion yuan (US$3.5 billion). In June this year, Hong Kong became the first place outside the Mainland to offer Renminbi-denominated bonds. So far three Mainland banks have issued Renminbi bonds totalling 10 billion yuan (US$1.25 billion).
Another opportunity that has emerged from our enhanced status as the international financial centre for China is the Qualified Domestic Institutional Investor scheme, or QDII. This has recently been expanded to allow more Mainland banks, as well as securities and insurance companies, to invest in Hong Kong and overseas. The QDII scheme will be expanded further from January 1 when the latest phase of our free trade pact with the Mainland comes into effect.
Now, you might ask - how can Hong Kong have a free trade pact with its sovereign power? Under the "One Country, Two Systems" concept, Hong Kong remains a separate member of the World Trade Organization. That is why we are able to establish CEPA a free trade arrangement between the Mainland and Hong Kong.
CEPA provides Hong Kong companies with preferential access to the Mainland market, above and beyond its WTO commitments. And because we have a nationality-neutral policy, overseas firms incorporated in Hong Kong can enjoy the same benefits from CEPA as local companies.
CEPA provides also tariff-free access to the Mainland for any goods made in Hong Kong by any company meeting the origin rules requirements. On the services side, CEPA currently covers 27 sectors, including banking, insurance, legal, logistics and tourism services. Another 11 sectors will be added from January 1.
Here's one example of how the banking sector will benefit further from CEPA next year. From January 1, the asset threshold for a Hong Kong registered bank acquiring a share of a Mainland bank will be reduced from US$10 billion to US$6 billion. The new measures in 2008 will also fast-track applications to set up branches in Guangdong province adjoining Hong Kong, and other designated areas.
As I said earlier, CEPA covers manufactures and currently 27 services sectors, to be expanded to 38 within a couple of weeks on 1 January 2008. This is an opportunity that we would like Indian business to look at - especially companies looking to expand internationally. Indian entrepreneurs have a long history in Hong Kong, and many are well known figures in our community. They embody our city's reputation for new ideas, hard work and the world-famous "can do" Hong Kong spirit.
In Hong Kong, we have about 1,500 Indian firms, including some big names such as GATI, Air India and Infosys Technologies. Many other smaller enterprises are also doing quite well. Alas, only one Indian company holds a Service Supplier Certificate under CEPA. I encourage more Indian companies to take advantage of this unique opportunity.
There are other reasons - in addition to CEPA - to consider making Hong Kong your business partner. For example, our simple and low tax system. Profits tax is currently levied at 17.5%, but it will be lowered by 1% in the next fiscal year. Salaries tax will also be lowered by 1% to 15% at that time. In Hong Kong, if you work hard you get to keep most of what you earn. Add to that tax recipe the following: No VAT. No capital gains tax. No estate duties. Only income sourced in Hong Kong is taxable.
Hong Kong is also a committed free-market practitioner. We have a freely convertible currency and no restrictions on investments. We run a duty-free port. We try to keep red tape to an absolute minimum. And we have a robust and transparent regulatory regime. Throughout the financial turmoil of the past decade, Hong Kong retained its spot as the world's freest economy, according to separate studies by the Heritage Foundation, in the US, and the Fraser Institute of Canada. We have come out on top of those two studies every year for more than a decade.
While we all want the good times to keep on rolling, we also know from painful experience that there will inevitably be bumps along the way. The US sub-prime problem and its affect on global markets is a case in point.
That is why, in the past few years, we have been shoring up our regulatory regime so that our financial sector, and, indeed, the overall economy, is more resilient to shocks in the future.
Strengthening of risk management has become a top priority. Implementing Basel II has been an important part of our risk management strategy. In fact, Hong Kong was among the first jurisdictions in the world to implement Basel II.
In addition to Basel II, stress testing has also become an integral part of our financial infrastructure in recent years. Since 2003, all authorised institutions have been required to have a stress-testing programme in place to make sure they are healthy enough to bear the risks they are taking.
Our prudent risk management strategy appears to be paying off. In September, a study ranked Hong Kong first in Asia for corporate governance. This was jointly published by investment group CLSA and the Asian Corporate Governance Association. The report highlights some of our strengths, such as shareholder voting, the disclosure of regulatory enforcement activities, voluntary de-listings and press freedom.
Ladies and Gentlemen, I hope I have been able to give you a clear picture of where Hong Kong is today and our determination to do even better in the future. It is certainly my wish that you will be able to pay us a visit soon to get a first-hand look and a taste of life in Hong Kong. Some of you may even be tempted to make use of our various schemes to attract talented people, or investor migrants. You'll find Hong Kong a welcoming prospect.
Hong Kong already has a 30,000-strong Indian community - people who contribute to the pluralism and diversity of our city. If your company is considering setting up a regional base in our part of the world and you are wondering how to get started, we have that covered. InvestHK is a government office dedicated to helping new overseas businesses get up and running. Our Trade Development Council will also help you find the ideal business partner.
When the global business community thinks about the future these days, it thinks of China and India. Why don't we make that a wining combination? I believe there is no better time to improve the links between our two countries. And I believe there is no better place than Hong Kong through which to do it.
Thank you.
Ends/Wednesday, December 12, 2007
Issued at HKT 18:57
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